When I finally shut down my laptop and retire, I want life to be easy and my income to be passive. I want it to drive tax free. And I think the best way to generate passive income in retirement is to max out my £20,000 annual allowance on stocks and ISA shares.
After all these years it’s easy to take Benefits of ISA for granted, but they are absolutely brilliant. I can invest up to £20,000 a year – far more than I can really afford – in stocks and shares of my choice without any tax liability to HM Revenue & Customs.
I max out my ISA by £20,000
All capital gains and passive dividend income I generate will be tax exempt for life. No income tax, no capital gains tax. I can even pass on these incredible tax benefits to my partner when I die. It’s only when I’m sadly gone that HMRC will try their luck, via inheritance tax.
Sounds like a brilliant offer to me. All other income I earn in my lifetime will be subject to both income tax and national insurance. Worse still, the tax burden and NI will increase further from April. This is because Chancellor Rishi Sunak froze the income tax threshold for five years and appears to be continuing his 1.25% levy on the NI for most workers.
While the income I earn from my day job is taxed until death, the passive income I generate from my ISA when I retire is tax exempt. I’m not sure that makes sense, that’s how it is.
Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decision.
All of this only intensifies my desire to generate passive income in retirement, primarily by investing in UK equities. I have some exposure to global equity markets such as the US, Europe and emerging markets, through investment trusts and exchange traded funds (ETFs).
Passive income for me, tax free
I love UK stocks because they offer some of the most generous passive income in the world. At this moment, the FTSE100 yield 3.56%. That’s pretty impressive, given the lousy returns for silver. It would likely be even higher were the UK economy not yet in recovery mode from the ravages of Brexit, Covid and now Putin.
While I’m still working, I will passively reinvest my dividend income to buy more stocks. And I will continue to do so until I reach retirement sometime in the next 15 years. After that, I will claim my state pension and collect a personal pension, while doing my best to stay within the limits of the personal allowance.
Once I reach this level, I will start earning non-taxable passive income from my stocks and ISA shares. Of course, the value of the stocks I buy don’t always go up, and dividend income isn’t guaranteed the way savings account interest is. But I still consider these ISA standards too good to be true. One day a cash-strapped chancellor might agree with me and cut the ISA allowance. This gives me another great reason to do the maximum today.
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Harvey Jones does not hold any of the shares mentioned in this article. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.